Suppose that at the start of fiscal year 2006 the government had a debt of $6800 billion. Suppose that during fiscal year 2006, real GDP grew by about 5 percent and inflation was about 3 percent. What is the largest deficit the government could have run without raising the debt-to-GDP ratio?
A)about $544 billion
B)about $375 billion
C)about $245 billion
D)about $184 billion

Question

Quizplus · Accepted Answer

The debt-to-GDP ratio remains constant if the deficit is equal to the growth in nominal GDP. Nominal GDP growth is the sum of real GDP growth (5%) and inflation (3%), totaling 8%. Therefore, the largest deficit that can be run without increasing the debt-to-GDP ratio is 8% of the initial debt, which is 0.08 * $6800 billion = $544 billion.

Suppose That at the Start of Fiscal Year 2006 the Government